One of the legal practice series for the operation of commercial and office real estate projects: How do lessors deal with legal risks of clearance

LABEL： Real estate ,

After three years of the epidemic, China's economic operation is still affected by various internal and external factors, and the economic recovery is facing a wave like development and tortuous progress, full of challenges and pressures, especially the real estate industry, which is the first pillar industry, has been greatly impacted and performed poorly. Taking Hong Kong funded real estate companies as an example, in the first half of 2024, Henderson Land's mainland rental income was HKD 3.338 billion, a year-on-year decrease of 6%. The final lease out rate of its developed and operated Shanghai Henderson Plaza decreased by 10% year-on-year, while the basic profit of Hong Kong Land fell by 32% year-on-year. The vacancy rate of the Land Plaza project increased to 2.6%. In this overall context, the frequency of landlords of shops and office buildings having to unilaterally terminate lease contracts due to various reasons such as tenants' overdue rent payments and unauthorized termination of leases has greatly increased. After the lessor exercises the right of termination in accordance with the lease agreement and legal provisions, they have the right and obligation to clear the premises and reclaim the leased property as soon as possible to avoid further losses. However, at this time, the lessee often does not cooperate in returning the property. How to deal with potential legal risks during the clearance process has become a key concern for the lessor. Improper operation may exacerbate the conflict and disputes between the two parties, and may also create obstacles for the lessor to claim rent arrears, liquidated damages, and other damages from the lessee.

Based on our past practical experience, we have conducted a preliminary discussion on how the lessor can deal with the legal risks that may arise in such situations and put forward the following precautions for readers' reference.
1、 Preparation work
1. Review the contents of relevant documents such as the housing lease contract and confirm that the conditions for legal clearance are met:

The premise for the lessor to clear the premises and reclaim the leased property is usually due to the lessee's breach of contract (such as long-term arrears of rent), which results in the lessor exercising the right to unilaterally terminate the lease agreement in advance. In the relevant documents such as the lease agreement signed between the lessor and the lessee, it is usually explicitly stipulated that the arrangement for the restoration and return of the leased property after the termination of the lease agreement will be made. The lessor shall pay attention to verifying the clearance conditions stipulated in such documents and strictly follow the agreement in the practical process (including delivering a legal and valid termination letter to the lessee, meeting the lessor's clearance procedure requirements stipulated in the contract, etc.).
2. Send a reminder letter to the lessee in advance regarding the restoration and clearance matters:

Timely sending various letters to remind the lessee is not only an important way to urge the lessee to fulfill the contract according to the agreement, but also an effective way to avoid or reduce the lessor's risks.

Therefore, regardless of whether there are explicit requirements in the relevant lease agreement, the lessor should pay attention to issuing a written reminder letter to the lessee regarding the clearance matters before the formal clearance, reminding the lessee of the relevant arrangements and legal consequences of the clearance matters.
3. Determine the clearance time:

The lessor usually needs to determine according to the provisions of the housing lease contract and other relevant documents (if there is no special agreement in the contract, it should generally be carried out within a reasonable time after the termination of the housing lease contract, that is, to avoid clearing the premises during the existence of the lease relationship), and coordinate the time of all parties involved in clearing the premises.
4. Organize, coordinate, and notify all parties involved in the clearance of relevant clearance arrangements.
2、 Conventional clearance process

(1) On the day of clearance, in the presence of the lessor's personnel, property management company personnel, and third-party witnesses (such as lawyers), open the door lock of the leased property and proceed with the clearance.

In special circumstances, if the lessee's personnel do not have the key to the door lock of the leased property or the key to some rooms in the leased property, they may consider directly unlocking, breaking the lock, or hiring a third-party unlocking company to unlock it. During the process of breaking the lock, attention should be paid to how many entrances and exits there are in the leased property, and only one door should be opened at a time. All personnel should enter and exit through one entrance and exit.

(2) From the moment the door lock of the leased property is opened, the lessor's personnel are responsible for conducting full video shooting and ensuring that the video records present the true and complete situation of the remaining items, decoration, restoration status, etc. inside the leased property.

Considering that there may be disputes between the lessor and lessee regarding clearance related matters in the future, the court may require the lessor to submit the original carrier of such videos to prove their authenticity. Therefore, it is best for the lessor to use specialized equipment such as cameras for video shooting and properly store such specialized equipment and video records; Try to avoid directly using mobile devices of the lessor's personnel, property management company personnel, or third-party witness personnel for video shooting, otherwise there may be difficulties in finding or losing the relevant original carriers, which may have a negative impact on subsequent litigation.

(3) Count and record the remaining items, decoration, restoration status, etc. in the leased property (the decoration, restoration status, etc. can be recorded by the lessor's engineering team from a professional perspective). When entering the leased property, orderly entry, proper recording, careful counting, careful sealing, safe handling and storage should be carried out to avoid infringing on the ownership of the lessee's property.

(4) Shoot and transcribe the readings of water meters, electricity meters, gas meters, etc. corresponding to the leased property (based on the requirements of the property management party where the leased property is located, the lessor can arrange professional personnel from the engineering business team to shoot and transcribe relevant readings).

(5) Arrange for the cleaning, handling, and other restoration work of the remaining items on site (if the cleaning only requires recording the current condition of the leased property on the day of cleaning, this step can be carried out after the completion of step 6 below and recorded synchronously with a video).

(6) After completing the above steps, the cleaning personnel will withdraw and close the door locks to protect the scene (such as changing locks, applying seals), and stop filming.

(7) If necessary, a notary public can be invited to the site for notarization during the above-mentioned clearance process (such as items left on site, decoration with significant value, and potential litigation disputes).

(8) If the lessor is not required to retain any remaining items, they shall promptly send a notice letter to the lessee regarding the collection of the remaining items, notifying them to collect the remaining items within a specified period of time; If the lessee fails to collect the items beyond the deadline, the lessor will dispose of them on their own (please pay attention to whether there are any special provisions for the disposal of remaining items in the relevant housing lease contract). After the lessor completes the clearance, they should store the relevant remaining items in a unified manner and keep them for a reasonable period of time (depending on the actual situation of the items), and dispose of them when it is determined that the lessee is unlikely to claim rights against the lessor regarding the relevant remaining items.
3、 Internal procedures and clearance records of the lessor

After the lessor completes the clearance work, they should pay attention to properly keeping the following records:

(1) List of on-site items left in the leased premises (signed by representatives of all parties involved in the site clearance);

(2) Record of on-site decoration and restoration status in the leased property (mainly applicable to situations that may involve claims or disputes with the lessee);

(3) Video recording of the cleaning process and on-site situation;

(4) Photos of water meters, electricity meters, gas meters, and other readings of the leased property on the day of clearance (if applicable).

In addition, after the clearance is completed, the lessor should make arrangements for the internal circulation of the leased property after its recovery. The relevant departments such as business, legal, engineering, property management, and finance should do a good job in coordinating and promoting the restoration and re leasing of the relevant property to avoid the lessor's losses from expanding.
4、 Handling of special circumstances

The above are the routine precautions for the lessor during site clearance. In practice, there may be some special situations that may occur. We have summarized the following typological issues and related suggestions for your reference.
What should the lessee pay attention to when leaving items or decoration with significant value after clearing the site?

The handling of leftover items is often one of the important issues that can easily lead to disputes in lease contract disputes. For situations where there are significant residual items or decoration values, the lessor should handle them more cautiously and try to avoid the lessee from claiming compensation from the lessor or incurring other legal risks (such as the relevant items belonging to third parties or possibly being identified as stolen goods). In this regard, please pay attention to the following:

(1) The lessor shall give sufficient prior notice to the lessee, and in the absence of the lessor's need to retain any remaining items, the lessee shall collect the remaining items or carry out demolition and restoration of the house decoration as much as possible (in some cases, the court considers that sending only one notice by the lessor does not constitute sufficient notice, so the lessor may send as many notices as possible and pay attention to preserving evidence before actually disposing of the remaining items);

(2) If the lessee still does not collect the relevant remaining items after multiple reasonable notices from the lessor, the lessor may keep such items for a period of time (such as six months to one year), determine that the lessee is unlikely to claim rights from the lessor, and dispose of such items (such as selling, discarding, etc.), and keep records and documents of such disposal work for future reference;

(3) If the lessor determines that the basis for terminating the lease agreement is not solid enough and there is a high possibility of being challenged by the lessee, it is best to hire a professional evaluation agency to assess the value of the relevant items and decorations before disposing of them or demolishing them, in order to respond to potential claims from the lessee in the future;

(4) If the lessee is suspected of committing a crime and has been investigated or may be investigated, it is best to verify with the public security organs and other departments before disposing of the relevant items whether the remaining items may be identified as stolen goods and whether they can be disposed of on their own;

(5) Regarding how to avoid the risks that may arise from unauthorized disposal of third-party items stored in the leased property, please refer to point 2 below.
2. How to handle items stored by third parties in the leased premises after clearance (such as items stored by store members in the leased premises)?

The lessor shall first review the relevant documents such as the lease agreement and confirm whether there are any relevant provisions. If there are, they shall be executed in accordance with the provisions; If there is no relevant agreement, the following methods should be considered:

(1) If the third party or its contact information cannot be determined, it can post an announcement outside the leased house or issue an announcement (if any) on the lessor's official official account and other platforms to notify the third party to collect it in time;

(2) If the third party and their contact information can be determined, a letter can be directly sent to notify the third party to request timely collection of the item;

(3) If a third party voluntarily declares themselves as the owner of the item and requests to retrieve it, they should be required to provide documents proving the ownership of the relevant item, sign a corresponding commitment letter, and request written confirmation from the lessee. On the premise of meeting the above conditions, the lessor may consider agreeing to allow such third parties to directly collect the relevant items.
3. What should be noted when there are many small tenants involved in subleasing businesses such as shared office space operated by tenants?

Small tenants, as secondary tenants, often prepay relevant security deposits, rent, and other fees to the lessee. The unilateral clearance by the lessor will have a significant impact on the rights and interests of small tenants, and it is often prone to disputes and increase the difficulty of clearance. Therefore, caution should be exercised towards this type of clearance, and special attention should be paid to the following:

(1) Before terminating the lease agreement, the lessor should first conduct a thorough investigation of the situation of the small tenant, including the name, quantity, sublease area, pre paid security deposit, and approximate rental information of the small tenant;

(2) Develop relevant clearance plans based on the investigation, clarify the clearance process and emergency plans for different situations, such as how to handle small tenants who do not agree to vacate the house, whether they agree to directly sign a new lease contract with small tenants, how to handle the security deposit and rent paid by small tenants to the lessee when signing a new lease contract, the response plan for small tenants who take strong resistance measures against clearance, and the management of the process of moving out items left by tenants and small tenants;

(3) If the lessor decides to terminate the lease agreement and forcibly evict small tenants, attention should be paid to:

1) After the lessor terminates the lease agreement, they should inform each small tenant of the termination of the contract as soon as possible and require them to move out within a specified period of time. The notification method can be by posting a notice in a prominent location or sending a letter directly to the small tenant;

2) Request the lessee to cooperate with the clearance of small tenants as much as possible, and require them to bear the corresponding responsibilities arising from such clearance for small tenants (such as returning the deposit and prepaid rent, etc.).
4. Notarization precautions

According to relevant regulations such as the Notarization Law of the People's Republic of China and the Notarization Procedure Rules, the legality of the application for notarization is a key review item before the notary office accepts the notarization application. In the event that the lessor unilaterally terminates the lease agreement, the notary office may have doubts and concerns about the legality and effectiveness of such termination, as well as whether subsequent clearance may infringe upon the lessee's legal possession of the leased property.

Therefore, based on our practical experience, notary offices often adopt a cautious attitude towards clearance notarization in such situations. If the lessor deems it necessary to notarize, they should communicate with the notary office in advance, including whether notarization is possible, the scope and content that can be notarized (such as whether the notary office only agrees to notarize the video of the clearance process, or whether it can notarize the list of relevant remaining items, etc.). There are significant differences in the examination standards and requirements of different notary offices, and specific communication is needed based on the specific case situation.
How to deal with disputes that may arise from selling membership cards/stored value cards in shops?

For the situation where the lessee who opens a shop in the leased property has already sold membership cards/stored value cards to consumers, if the lessee of the shop stops operating, it may result in consumers being unable to recover the relevant prepaid fees. In the case where it is difficult for them to find the lessee of the shop, they may not only directly claim compensation from the lessor, but also have a certain adverse impact on the business order and commercial image of the property where the leased shop is located.

In addition, according to the "Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Civil Disputes over Prepaid Consumption (Draft for Comments)" [3], consumers who directly claim compensation from the lessor in this regard may also receive court support in the future.

In such cases, the lessor may consider the following:

(1) The lessor shall, as soon as possible after sending a written letter to terminate the lease contract, post a notice in a prominent position or issue a notice (if any) on the lessor's official official account and other platforms, inform consumers in the form of public notice that the relevant store is about to stop operating and suggest them to contact the store lessee as soon as possible to solve the relevant remaining problems;

(2) If there are fees that should be refunded to the lessee (such as rental deposits, etc.), it may be considered to extend the refund period within the scope allowed by the contract until a certain period after the leased property is recovered, such as retaining until the risk of consumer claims due to membership cards/stored value cards has been basically eliminated based on reasonable judgment.

The above content is for readers' reference and we hope it will be helpful to you. We will continue to release a series of articles on commercial and office real estate operations in the future. We hope you will continue to follow us. Thank you!